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Digital Health Pulse: Regulatory and Transactional Developments

In this recently released podcast, Ropes & Gray life science partners Gregory Levine (Washington, D.C.), Albert Cacozza (Washington, D.C.) and Michael Beauvais (Boston) cover the latest changes in digital health regulation, investment and transactions, providing insights on disruptive forces, the current and future regulatory landscape, and current and expected investments in the market.

Mr. Levine: I’m Greg Levine, a partner in the life sciences practices at Ropes & Gray. I’m here today with my partners Al Cacozza and Mike Beauvais to discuss the rapidly-changing digital health landscape. We have seen significant investments in digital health, but also significant uncertainty about the regulation of these products. Al, let’s start with the regulatory issues. What are some of the latest developments there and how are they affecting companies in this space?

Mr. Cacozza: Well, Greg, there have been a number of developments on the regulatory front. The FDA, for example, has issued a series of guidelines, most recently the general wellness guideline, which has clarified the regulatory authority, in terms of whether or not products in this space are considered medical devices or not. And the FDA, which had been subject to significant criticism by the industry, has really, I think, gone out of its way to try and be as clear as possible that they are going to focus their attention on those products that are classic medical devices that raise potential safety risks to the patient. And so, for example, in the general wellness guidance, they’ve indicated they are not intending to regulate as devices any product, including software or wearables, that focuses on wellness issues or that even identifies specific chronic diseases, provided that those products are focusing on the lifestyle aspects of those diseases. For example, a product that monitors your caloric intake to help a diabetic manage a diabetes condition or that focuses on your sleep patterns in terms of documenting those patterns that help if someone is suffering from depression. So I think that the FDA has helped give a roadmap to companies in this area, in terms of whether they will be regulated or not.

Mr. Levine: Turning toward the future, what do you see on the horizon for digital health regulation?

Mr. Cacozza: On the flip side, while the FDA has been cutting back on its regulatory authority in this industry, other agencies, particularly the FTC, have stepped up to say that they are going to enforce their classic unfair trade practices and privacy and security authority over the companies in this space. I think you’ll also see that state attorneys general in some states where they’re passing new laws are taking a more active role in looking at products that are coming out of this industry. So what you’ll see in the future is perhaps a shift away from classic FDA regulation, and more toward general business regulation and privacy and data security regulation by both the FTC and the state regulators.

Mr. Levine: Thanks, Al. A lot happening, obviously, on the regulatory side. Now let’s turn to the transactional side of things. Mike, why don’t you tell us about what you’re seeing there?

Mr. Beauvais: Thanks, Greg. Well, let’s start with the data. So for 2015 we had over 180 M&A transactions in the digital health space. We also had $4.5 billion invested in digital health companies. We had five IPOs, most notably FitBit and Teladoc. And for 2016, so far it’s going to even surpass 2015. We have $3.9 billion in digital health funding. What’s most interesting to me is that over 65% of the deal volume, in terms of investments, was focused in the early stages, so we’re talking Series A rounds. Further, kind of slicing that data, you had patient and consumer experience companies being number one, then you had wellness, personalized health and big data analytics falling behind those as well. So that’s kind of where the dollars are going on the transactional side. In terms of the disruptive forces at play here, I think there are a few key points. One is rapid market changes, so you have this newfound ability to collect, process and apply learning to all these different data streams, you have the new technology and tools for monitoring lifestyle and health generally, and then you have intensive community interest. So that’s kind of on the market change side of the fence. On the legal changes side we have, as Al had mentioned, significant regulatory focus, both at the federal and state level, you have the demise of strong patent protection, as it relates to some of these technologies. And then you also have the Affordable Care Act, and the different payers looking at using bundled payments and other methodologies to see whether or not there’s any true data proposition for use of these technologies.

Mr. Levine: So you’ve told us about the current market, and a bit about some disruptive forces. What do you see coming down the pike in the future?

Mr. Beauvais: So for 2016, I continue to think it will rival if not surpass 2015 in terms of investment in this space. I think you’re going to see a lot of the early-stage companies fail, but the ones that are able to address at least one of the propositions that we’ve been talking about in this podcast, facing companies and consumerables, they will be able to demonstrate that they do have either market acceptance of the products, that they’ve been able to either surpass or get around any legal or regulatory hurdles as a way to differentiate their products. I think you’re going to see data privacy and security being also an important tenet of these products, so to the extent that a product is able to demonstrate that they are either HIPAA-compliant, to the extent that they use protected health information, or that they’re able to operate independent of those regulations is critical, and then finally the value proposition. Showing that the technology can either improve patient outcomes or save commercial dollars, as these technologies are applied I think will certainly be of interest to the investor community.

Mr. Levine: Thanks so much, Mike and Al, to you, for your insights, and thanks for listening. Please visit the digital health page at www.ropesgray.com for additional insights into digital health developments.